“

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

Project

Investment and Competition Law

TOPIC – Analysis of Anti competitive agreements : TIE-IN

Submitted to Prof. Sudha Kavuri

Submitted by
Bharath Simha Reddy
2015022 VII sem

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ACKNOWLEDGEMENT

I have made my project under the supervision of Mrs Varshitha Mangamuri, Faculty Lecturer,
DamodaramSanjivayya National Law University. I find no words to express my sense of gratitude for
a mam for providing the necessary guidance at every step during the completion of this project.  

I am also grateful to the office, librarian and library staff of DSNLU, Visakhapatnam for allowing me
to use their library whenever I needed to. Further I am grateful to my learned teachers for their
academic patronage and persistent encouragement extended to me.  I am once again highly indebted
to the office and Library Staff of DSNLU for the support and cooperation extended by them from
time to time. I cannot conclude with recording my thanks to my friends for the assistance received
from them in the preparation of this project.

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 INTRODUCTION

Since attaining independence in 1947, India for the better part of half a century
thereafter adopted and followed policies comprising of what are known as “Command-and-
Control” laws, rules, regulations and executive orders1. The then competition law in India
was the Monopolies and restrictive Trade Practices Act, 1969 (MRTP Act in brief). It was in
1991 that there was widespread economic reform and consequently an economy based on
free market principles came into force. Economic liberalisation in India was seeing the light
of the day and the need for an effective competition regime was recognised. The new
competition Act, 2002 was introduced in replacement of the MRTP Act. The repeal of the
MRTP Act was on the ground that the act was not suited to deal with issues of competition
that may be expected to arise in the new liberal business environment2.

In the MRTP Act, tie-up sales were dealt under Restrictive Trade Practices (RTP). It
was considered as a practise which had the effect of preventing, distorting or restricting
competition or as a practise which tends to obstruct the flow of capital or resource into the
stream of production. An entity, body or undertaking charged with the practise of RTP had to
plead for gateways provided in the MRT Act to avoid being indicted.

Under the Competition Act, Tie-in arrangement is dealt with under the head Vertical
Anti-Competitive Agreement. A tie-in arrangement, under this Act, is not illegal per se but if
it has an appreciable adverse effect on the competition, then it becomes illegal. Tie-in
arrangements have both good and bad effects on the competition. On one hand tie-in
arrangements may result in price discrimination, barriers to new entry in the market,
monopolisation of the tied and tying products. On the other hand tie-in arrangement may
benefit the consumers by providing them with goods or services in a bundle which are
required and at lower price. But tie-in arrangements are more likely to adversely affect the
economy than being beneficial to the economy. Its effects are discussed later in the paper.

1
Dr. Chakravarty, S., ‘MRTP Act metamorphoses into Competition Act’ pg no. 5
2
Ramappa T., ‘Competition Law in India Policy, Issues and Development’ 12(2006) (New York, Oxford University
Press)

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 ANTI-COMPETITIVE AGREEMENTS

“People of the same trade seldom meet together, even for merriment and diversion,
but the conversation ends in a conspiracy against the public, or in some contrivance to raise
prices.”3
This statement of Adam Smith makes it abundantly clear for a need to have a proper
regulatory mechanism for prevention of anti-competitive agreement which not only affect the
market economy leading to monopolistic approach but also victimizes the consumers and
thereby cause harm to the entire economy creating hindrance to the competition in the
market.
Anticompetitive agreements can be said to be agreements that negatively or adversely
impact the process of competition in the market. According to an OECD/World Bank
Glossary, anticompetitive practices refer to a wide range of business practices that a firm or
group of firms may engage in order to restrict inter-firm competition to maintain or increase
their relative market position and profits without necessarily providing goods and services at
a lower cost or higher quality4. Similarly, it can be said that anticompetitive agreements are
agreements between firms or enterprises that restrict or prevent or otherwise unfavourably
affect competition, and that may help increase the market position or share of the parties and
may also be to the disadvantage of the consumer as the products and services may be
available at a higher cost than are available in a competitive market and also may be of a
lower quality.
Prohibition of anti-Competitive Agreements has been provided under Section 3
Chapter II of the Competition Act, 2002which besides prohibition of certain agreements also
deals with abuse of dominant position and regulation of combinations of the Act. The
provisions of the Competition Act relating to anti-competitive agreements were notified on
20th May, 2009.
Section 3 of the Act specifically deals with anti-competitive agreements.
Sec. 3(1) of the Act is general and broad in scope. It prohibits any agreement between
enterprises or persons in respect of production, supply, distribution, storage, acquisition or
control of goods or provision of services, which causes or is likely to cause an appreciable
adverse effect on competition within India. there are no hard and fast rules for anti-

3
Smith Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, London Publication (1776) Pg
88 in Parihar, Pratima ‘Anti-competitive Agreements – Underlying Concepts and Principles under the
Competition Act, 2002’, (2012)Pg 16.
4
World Bank/OECD: “Glossary of Industrial Organization on Economics and Competition Law”.

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competitive practices or conduct i.e. each case is to be decided on the basis of facts, under the
rule of reason, which means that adverse affect on competition has to be established as a fact
in each case.
Sec. 3(2) of the Act declares all such agreements as void, which are entered into by
persons or enterprises in contravention of the provisions laid down in sub-section (1) of Sec.
3.
Sec. 3(3) specifies certain anti-competitive agreements that may be entered into, or
practices that may be carried on, by enterprises supplying similar or identical goods or
services, or cartels. Under sec. 3(3), those agreements or practices carried on by that class of
enterprises are presumed to have an appreciable adverse effect on competition, then they are
per se violation of the Act.

Sec. 3(4) deals with vertical restraints. These are restrictions among enterprises at
different stages or levels of production chain in different markets. This covers supply of
goods as well as services. Vertical agreements at different levels of the production or supply
chains often have strong efficiency rationales and enhance competition. However, they may
also have anti-competitive effects, unfairly eliminating rivals or making them less effective
competitors, or reducing competition between buyers or sellers. Since, there is a great chance
that vertical anti-competitive agreements may not be anticompetitive, regulators require a
systematic economic assessment of whether pro-competitive or anti-competitive effects of a
vertical agreement will dominate when these agreements involve enterprises with a
significant market share. Vertical restraints are to be examined under the rule of reason and
appreciable adverse effect has to be established in each case.

Sec. 3(5) provides certain exceptions. The exceptions protects the rights of the owners
of the intellectual properties from the provisions listed in sec. 3 from infringement of any of
his rights and impose reasonable restrictions for protection of any of those rights. The terms
of agreement relating to export of goods or supply of services abroad are also exempted
under this section.

Once an agreement is determined as causing or is likely to cause an appreciable

adverse effect on competition, such agreement being void cannot be enforced by parties in a
court of law. This could lead to serious difficulties for a party in trying to enforce any claim
under such agreements in a court of law. Therefore the consequences of an agreement being
held be anti-competitive could be far reaching for the enterprises.

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TYPES OF ANTI COMPETITIVE AGREEMENTS
Anti-competitive agreements are divided into two types:
1. Horizontal Agreements
2. Vertical Agreements

Horizontal Agreements – these are agreements between independent undertakings operating

and supplying to the same market to fix prices or apportion markets or restrict output with a
view to control prices in a market.
For example between:
Manufacturer A – Manufacturer B
Supplier A – Supplier B
Dealer A – Dealer B

The types of Horizontal agreements are –

Cartels,
Bid-rigging agreements,
Output restrictions,
Price fixing and
Market allocation.

Vertical Agreements – these are agreements between business entities operating at different
level of chain.
For example between:
Supplier -Distributor
Manufacturer -Supplier
Distributor -Manufacturer.

The different types of vertical agreements are

Exclusive supply/purchase agreements,
Tie-in arrangements,
Resale price maintenance,
Refusal to deal.

The Act does not specifically use the words Horizontal agreements and vertical agreements
but the agreements referred to in Sec. 3(3) are horizontal agreements and those referred to in

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Sec. 3(4) are vertical agreements. Usually horizontal agreements are viewed more seriously
than vertical agreements because they are prima facie more likely to reduce competition than
agreements between firms in different levels of the chain. Horizontal agreements have more
anti-competitive effect and are more likely to have appreciable adverse effect on the
competition than the vertical agreements5.

This research paper deals with one of the type of vertical agreement i.e. tie–in arrangements.
Its types, effects and regulation in India are the main focus of this research paper.

DIFFERENCE BETWEEN HORIZONTAL AND VERTICAL AGREEMENTS

5
Ramappa T., ‘Competition Law in India Policy, Issues and Development’ 12(2006) (New York, Oxford University
Press)

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 Horizontal and Vertical Anti-Competitive Agreements are very different and easily
distinguishable. The differences between the two are as follows:

HORIZONTAL ANTI-COMPETITIVE VERICAL ANTI-COMPETITIVE

AGREEMENT AGREEMENT
In Horizontal Agreements the parties to In Vertical Agreements the parties to
theagreement are enterprises at the same theagreements are non-competing
stageof the production chain engaged in enterprisesat different stages of the
similartrade of goods or provision of production chain.
servicescompeting in the same market. For e.g. agreements essentially
For e.g. agreements between producers betweenmanufacturers and suppliers i.e.
orbetween wholesalers etc. betweenproducers and wholesalers or
betweenmanufacturers and retailers etc.

Horizontal Anti-Competitive Agreementsare Vertical Anti-Competitive Agreements

entered into between rivals orcompetitors. areentered into between parties having
actualor potential relationship of purchasing
orselling to each other.

Horizontal Anti-Competitive Agreementsare Vertical Anti-Competitive Agreements arenot

per se void. per se void.

The ‘rule of presumption’ is applied to The ‘rule of reason’ is applied to verticalanti-

Horizontal anti-competitive agreement competitive agreements.

Horizontal Anti-Competitive Agreementsthat Vertical Anti-Competitive Agreements arenot

determine prices or limit/controlproduction presumed to have an appreciableadverse
or share market/sources ofproduction by effect on competition andautomatically
market allocation or result in prohibited. Whether avertical agreement is
bid rigging or collusive bidding are anti-competitive ornot is to be decided on a
presumed to have an appreciable case by case basisconsidering the
adverseeffect on competition. consequences of theagreement and whether
they substantiallyrestrict competition or not.

The burden of proof is on the defendant The burden of proof is on the party
toprove that the agreement is not allegingthe anti-competitive practice to prove
anticompetitive. thatthe agreement is anti-competitive.

Examples of Horizontal Anti- Examples of Vertical Anti-

CompetitiveAgreements are cartels, bid- CompetitiveAgreements are resale price
rigging,collusive tendering etc. maintenance,tie-in agreements, exclusive
supply anddistribution agreements etc.

TIE-IN ARRANGEMENT

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 As defined in Explanation (a) to sub-section (4) of Section 3, tie-in arrangement
includes any arrangement requiring a purchaser of goods, as a condition of such purchase, to
purchase some other goods. The product or service that is required by the buyer is called the
tying product or service and the product that is forced on the buyer is called the tied product
or service.
A product or service is to be treated as being the subject of a tie-in arrangement when
its supply is offered on the condition that the buyer who ordered for some product or service
required by him is also forced to purchase some other product or service. The basic objection
that would arise from the point of view of the buyer is that he is required by compulsion to
buy a product or service that he does not need and so is forced to incur unnecessary cost.
From the point of view of the law protecting competition in the market, this would be
objectionable on the ground that it reduces competition in the supply of the tied product.
An example of ‘tie-in’ or ‘tying’ arrangement is when manufacturer of product ‘A’ and ‘B’
requires an intermediate buyer who wants to purchase product ‘A’ to also purchase product
‘B’. Tying may result on lower production costs and may also reduce transactions and
information costs for producers and provide them with increased convenience and variety.
Tie-in arrangements need not necessarily be anti-competitive. In India, due to the absence of
the per se rule, tying cannot be per se illegal. It can have negative effects on competition if
they fence off market efficiency

In case of tie-in arrangements, competition with regard to the tied product may be
affected as the purchaser may be forced to purchase the tied product at prices other than those
at which it is available in a competitive market or he may be forced to purchase a product
which he does not require. But in case the tied product is being sold at a lower price or at the
same price at which it is available in the market or if the tied product is required by the
purchaser, then such tie-in arrangement cannot be said to be anti-competitive. It is for this
reason that tie-in arrangement cases are decided on the basis of rule of reason after taking into
consideration the benefits and detriments of the arrangement on the market. It is yet another
requirement that the seller of the tied product has dominance over the market, so that the sale
of the tied product has appreciable adverse effect on the competition in the market.

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 In Northern Pacific Railway Co. V. United States 6, the Court observed that, “They
(tying arrangements) deny competitors free access to the market for the tied product, not
because the party imposing the tying requirements has a better product or a lower price but
because of his power or leverage in another market. At the same time, buyers are forced to
forgo their free choice between competing products”. For these reasons, tying arrangements
fare harshly under the laws forbidding restraints of trade.

TYPES OF OR TYING ARRANGEMENTS

Tying can be classified into two types. They are:-
1. Static Tying – Static tying can be thought of as an exclusive arrangement. In a static
tied-sale, the buyer who wants to buy product ‘A’ must also purchase product ‘B’. It
is possible to buy product ‘B’ without product ‘A’ which explains why it is a tie.
Thus, the items for sale are product ‘B’ alone or an ‘A-B’ package.

For example: the video game Halo is exclusive to the Xbox format. A buyer who
wants to buy halo must also purchase the Xbox hardware. The tie could arise from the
manufacturer’s power in the market of the Xbox hardware.

2. Dynamic tying –in case of this type of tying, in order to purchase product ‘A’ the
customer is also required to purchase product ‘B’. In dynamic tying the quantity of
product ‘B’ vary from customer to customer. Thus, the item for sale are a package of
‘A-B’, ‘A-2B’, ‘A-3B’ etc.

For example: A seller of a photocopy machine (product A) may require the purchaser
of the machine to use a specific brand of paper i.e. (product B). The paper salesoccur
over time and vary across users, based on their demand for the copies. A customer
would not need to determine how much paper to buy at the time themachine was
bought. But under the tying contract, whatever paper was requiredwould have to be
bought from the machine seller.

The dynamic tied sale is different from the static tie in another way. The good
involved in a dynamic tie are required to use the product. For example, one cannot use
a photocopy machine without a paper but one can enjoy Xbox without the Halo game.
6
Northern Pacific Railway Co. et al. v. United States 356 US 1 (1958)

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 Therefore, all the customers that buy the product ‘A’ must also buy product ‘B’ in a
dynamic tie.

FORMS OF TYING

Tying can take the following forms:

1. Contractual Tying– the tie may be the consequence of a specific contractual

stipulation. For example in the case of Eurofix-Bauco v. Hilti7, hilti required users of
its nail guns and nail cartridges to purchase nails exclusively from it.
The commission held that this requirement of Hilti exploited customers and harmed
competition and was an abuse of dominant position. A fine of 6 million was imposed
for this and other infringements.

2. Refusal to supply – the effect of tie may be achieved where a dominant undertaking
refuses to supply the tying product unless the customer purchased the tied product.

3. Withdrawal of a guarantee – a dominant supplier may achieve the effect of a tie by

withdrawing or withholding the benefits of a guarantee unless the customer uses the
supplier’s components as opposed to those of a third party.

4. Technical tying – this occurs where the tied product is physically integrated in to the
tying product, so that it is impossible to take one product without the other. This is
what happened in the Microsoft case.

US LAW ON TYING

7
Hilti v commission; T-30/89 [1990] ECR-II-163, [1992] 4 CMLR 16, CFI

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 Section 1 of the Sherman Act, 1890 and Section 3 of the Clayton Act, 1914 deal
with the concepts of Tying. A tying agreement is subject to both these provisions and
although the wording in the two sections differs, both of them apply a similar substantive
standard. Section 1 of the Sherman Act prohibits “every” agreement in “restraint of
trade”depending upon the “unreasonableness” of such a restraint. Section 3 of the Clayton
Act forbids tying agreements when “the effect....may be to substantially lessen competition or
tend to create a monopoly.” Though there appears to be no difference between these two
laws, the Courts, in their approach have pointed out the difference between the two statutes
and standards applied therein. One point of difference that was pointed out was that while the
Clayton Act requires only showing that the challenged conduct “may tend” to substantially
lessen competition, the Sherman Act requires proof of an actual effect on competition. Also,
the Clayton Act’s coverage is more limited than the Sherman Act, since the Clayton Act
applies only when both the tying and the tied products are tangible goods and commodities,
rather than real estate or intangibles such as franchises or services. Apart from these slight
differences, it was maintained that the analysis applied under the Clayton Act to tying
arrangements is very much like the analysis typically used under Section 1 of the Sherman
Act.

Tying under U.S. law has been defined as “an agreement by a party to sell
oneproduct but only on the condition that the buyer also purchases a different (or
tied)product, or at least agrees that he will not purchase that product from any
othersupplier”.

The assessment of tying arrangements under U.S. Antitrust law has undergone
significant changes over the time. There are three periods describing the change.
First, the early period of theper se approach: early cases reflect a strong hostilitytowards
tying arrangements that were regarded as having hardly any purposebeyond the suppression
of competition.”
Second, the modified per se illegality approach: Jefferson Parish8moved to an approach in
which the criteria for tying areused as proxies for competitive harm and, arguably,
efficiencies.
Third, the ruleof-reason approach: Microsoft III9introduced a rule-of-reason approach
towards tying; recognizing that, at least in certain circumstances, even the modified per se
8
Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde,[ 466 U.S. 2 (1984)]
9
United States v. Microsoft Corp., [253 F.3d 34 (D.C. Cir. 2001)]

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approach would lead to an overly restrictive policy towards tying arrangements.
In the early cases the per se approach played an important role. In United States Steel v.
Fortner, the court held that tying arrangements “generally serve no legitimate business
purpose that cannot be achieved in some less restrictive way.”

In Northern Pacific Railway v. United States10, the railroad was the owner of millions of
acres of land in several North western States and territories. In its sales and lease agreements
regarding this land, Northern Pacific had inserted “preferential routing” clauses. These
clauses obliged purchasers or lessees to use Northern Pacific for the transportation of goods
produced or manufactured on the land, provided that Northern Pacific rates were equal to
those of competing carriers.
The Supreme Court took the view that Northern Pacific had significant market power.The
court declared that the Per-Se rule applies “whenever a party has sufficient economic power
with respect to the tying product to appreciably restrain free competition in the market for
the tied product and a ―not insubstantial‘ amount of interstate commerce is affected. In this
case, the facts “established beyond anygenuine question that the defendant possessed
substantial economic power byvirtue of its extensive land holdings”

In the International Salt Co., Inc. v. United States 11case it was held by the courtthat
“sufficient economic power” could be established in a number of ways, not all ofwhich were
related to the concept of “market power”. Sellers forcing customers to accept unpatented
products in order to be able to use a patent monopoly, and the patent rights were deemed to
give the seller “sufficient economic market power”

In the second period of modified per se rule, the hostile approach towards tying was revised.
In the Jefferson Parish Hospital Dist No. 2 v. Hyde12case Supreme Court accepted that
tying could have some merit and struggled to devise a test that distinguished “good tying”
from “bad tying”. The US Supreme Court observed that the essential characteristic of an
invalid tie-in arrangement lies in the seller‘s exploitation of its control over the tying product
to force the buyer into the purchase of a tied product that the buyer either did not want at all,
or might have preferred to purchase elsewhere on different terms. Under the modified per se
rule it is per se unlawful whenever the seller has sufficient economic power with respect to

10
Northern Pacific Railway Co. v. United States,[ 356 U.S. 1 (1958)]
11
International Salt Co., Inc. v. United States, [332 U.S. 392, 395-96 (1947)]
12
Supra note 8 at 10

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the tying product to restrain appreciably free competition in the market for the tied-in
product.

The Rule of Reason co-exists with a per se rule in two senses13. Firstly some courts
have declined to find two products tied together when the challenged arrangement
seemsreasonable, either because it served legitimate functions or because threats to
competition seemed fanciful. Most frequently, the courts have ended up classifying a practice
as exclusive dealing rather than tying, with the result that it is made subject to the rule of
reason.
Secondly, the per se rule do not exhaust the concerns of antitrust law. A refusal to condemn a
particular restraint per se does not necessarily mean that antitrust law is indifferent to that
restrain or affirmatively approves it, the rule of reason remains applicable.

Tying arrangements that do not meet all of the elements of a per se tying claim may
still be held unlawful as unreasonable restraints of trade under a rule of reason
analysis.Unlike a per se analysis, where the focus of the inquiry is on the tying product, a rule
of reason inquiry looks at the competitive effect of the arrangement in the relevant market for
the tied product. However, it is unlikely that a tying arrangement that passes muster under the
strict per se standard will be found to violate the less rigorous rule of reason test

Although Jefferson Parish still represents the general position in the U.S. with respect
to tying, the Court of Appeals’ judgment in Microsoft III indicates a preference, in some
circumstances at least, for a rule of reason approach, noting the Supreme Court’s warning in
Broadcast Music v. CBS that “it is only after considerable experience with certain business
relationships that courts classify them as per se violations.”

In Microsoft III, the Court of Appeals concluded that a per se rule was inappropriate,
due to the fact that the circumstances in Microsoft III differed from previous cases, and that
the “separate products” approach used in Jefferson Parish was not a suitable approach given
that it was backward looking. The case was therefore referred back to the District Court with
a direction to conduct a rule of reason analysis which balanced the anticompetitive effects
and efficiencies.

13
Malik, Vikramaditya S., ‘The Doctrines of Tying and Bundling – Concept and the Indian Case’ (2010) Pg 21.

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EUROPEAN LAW ON TYING

Article 81(1) of the EC Treaty includes as agreements that which are incompatible
with the common market and the agreements that make the conclusion of contracts subject to
acceptance by the other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of such contracts.
Article 82 includes tying as an abuse of dominant position, thus Article 81 is attracted when
tying is part of an agreement concluded by a non-dominant supplier and a buyer. However,
Regulation 2790/1999 on Vertical restraints provides for a safe harbour system whereby
vertical agreements involving tying will be presumed compatible with article 81 if the market
share of the supplier is below 30% in the relevant market.14

Tying agreements are not illegal per se. An illegal tying agreement takes place when a
seller requires a buyer to purchase another, less desired or cheaper product, in addition to the
desired product, so that the competition in the tied product would be lessened. Sherman act
also pointed out that there should be separateness of products which are tied because if the
products are identical and market is same then there is no unlawful tying agreement.

The European Commission and European Courts have adopted a “unified” approach
to the different forms of tying and bundling.15 In other words, contractualtying( including the
tying of primary products and consumables) and integration ofproducts have been assessed in
the same way without taking into account thedifferent underlying effects of them on
competition.
The formal framework of the tying analysis is almost a carbon copy of the U.S.
perseapproach, following a four-stage assessment:
1) To establish market power (dominance) of the seller in relation to the tyingproduct;
2) To identify tying which means to demonstrate that (a) customers are forced(b) to purchase
two separate products (the tying and the tied product);
3) To assess the effects of tying on competition;
4) To consider whether any exceptional justification for tying exists
Market power
14
Ioannis Lianos, Vertical Restraints, and the Limits of Article 81(1) EC: Between Hierarchies And Networks, 3
J.Competition L. & Econ. 625 in Sundararajan, Preethi, ‘An Analytical Study of Nature and Types of Vertical
Anti-Competitive Agreements’, Pg. 21.

15
Gupta, Anisha, ‘Concept of Tying and Bundling and its Effect on Competition: A Critical Study of it in Various
Jurisdictions’ (2010) Pg. 24

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 Article 82 of the E.C. Treaty is applicable only to the extent that the commission
isable to establish dominance in a particular market. Dominance in the market for thetying
product has been a prerequisite for finding of abusive tying. Thus, the firstrequirement in the
case of an alleged tying abuse is to establish that the firm has adominant position in the
market for the tying product.
The Napier Brown v. British Sugar16case arose from a complaint by NapierBrown, a
sugar merchant in the United Kingdom, which alleged that British Sugar,the largest producer
and seller of sugar in the UK, was abusing its dominant positionin an attempt to drive Napier
Brown out of the UK sugar retail market.In the subsequent proceedings, the Commission
objected, among other things, toBritish Sugar’s practice of offering sugar only at delivered
prices so that the supply ofsugar was, in effect, tied to the services of delivering the sugar.
Having concluded that British Sugar was dominant in the market for “whitegranulated
sugar for both retail and industrial sale in Great Britain,” the Commissiontook the view that
“reserving for itself the separate activity of delivering the sugarwhich could, under normal
circumstances be undertaken by an individual contractoracting alone” amounted to an abuse.
According to the Commission, the tying deprived customers of the choice betweenpurchasing
sugar on an ex factory and delivered price basis “eliminating allcompetition in relation to the
delivery of the products.”

The Tetra Pak II17case also concerned the tying of consumables to the sale of
theprimary product. Tetra Pak, the major supplier of carton packaging machines andmaterials
required purchasers of its machines to agree also to purchase their cartonrequirements from
Tetra Pak. The Commission, upheld by the Court, condemned thetying as abuse of a
dominant position.

Tying
Tying has been defined by the Commission as (a) bundling two (or more) distinctproducts,
and (b) forcing the customers to buy the product as a bundle without givingthem the choice to
buy the products individually.

Separate products: The second requirement is establishing whether products A andB are
separate products. The main criterion to analyse in establishing whether twoproducts are

16
Napier Brown v. British Sugar, Commission Decision 88/519/EEC, 1988 O.J. (L 284) 41
17
Tetra Pak II, Commission Decision 92/163/EEC, 1992 O.J. (L 072) 1

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separate or integrated is the potential user or consumer demand for thetied product
individually, from a different source than for the tying product.

If B is a separate product, the relevant question is whether there is demand for A asa stand-
alone product. Are there consumers prepared to pay a price to acquireproduct A without
product B attached? If so, then A and B are separate products,otherwise, there are two
products AB and B, and A is just a component of the first ofthe two products. When there is
no demand for acquiring the components separatelyfrom different sellers, then no
competition-related issues under Art. 82 EC arises.Tying can only occur when the products
are genuinely distinct.

Coercion
Under E.C. law, as under U.S. law, coercion to purchase two products together is a key
element to establish abusive tying. Coercion may take many forms. Coercion is clearly given
where the dominant firm makes the sale of one good as an absolute condition for the sale of
another good.
A contractual coercion occurs when the requirement to buy product B is a condition for the
sale of product A, i.e. a refusal to supply the tying product separately.
Technical coercion is preventing the user from using the dominantproduct without the tied
product.
Financial coercion, on the other hand, is apackage discount making it meaningless to buy the
tied product separately.
This may be explicit in an agreement (for e.g. Tetra Pack II case) or de facto (for e.g.Hilti
case). However, lesser forms of coercion, such as price incentives or thewithdrawal of
benefits may also be sufficient.

Anti-competitive effects
Factual evidence of foreclosure is not necessary as a constituent element of tyingunder Art.
82 EC, but it is enough to show that tying may have a possible foreclosureeffect on the
market
According to the British Sugar case, tying does not need to have any significanteffect on the
tied market. British Sugar tied the supply of sugar to the service ofdelivering the sugar. The
Commission did not regard it as necessary to assesswhether the delivery of sugar was part of
a wider transport market and whether thetying foreclosed any significant part of such market.

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The fact that British Sugar had“reserved for itself the separate activity of delivering
sugar” was sufficient as ananticompetitive effect.
In Hilti, the Commission went one step further. It took the view that depriving theconsumer
of the choice of buying the tied products from separate suppliers was initself abusive
exploitation: “These policies leave the consumer with no choice overthe source of his nails
and as such abusively exploit him.”(Emphasis added.) In otherwords, as any tying by
definition restricts consumer choice in the way describedabove, the Commission’s position in
Hilti strongly suggests that foreclosure does nothave to be established and that, hence, tying
is subject to a per se prohibition (withthe possible exception of an objective justification).

Justification of cases
The practice of tying and bundling can be justified on a legitimate and
proportionatebasis. If the European Commission manages to prove the existence of the first
fourrequirements, the burden of proof for objective justification for the practice of tyingand
bundling shifts to the defendant. Legitimate objectives put forward forpractising tying and
bundling must be genuine. A legitimate objective is when tyingand bundling enhances
efficiency because it is more costly to produce, or distributethe tied products separately, or
there might be a need to ensure the quality or safetyof the products.

In the guidelines on Abusive Exclusionary Conduct, the Commission noted that

tyingand bundling may give rise to an objective justification by producing savings
inproduction, distribution and transaction costs. In addition, the Article 82 StaffDiscussion
Paper noted that “combining two independent products into a new, singleproduct may be an
innovative way to market the product(s),” and that such“combinations are more likely to be
found to fulfil the conditions for an efficiencydefence than is contractual tying or bundling.” 18
The guidance on AbusiveExclusionary conduct, however, simply notes that the Commission
may alsoexamine whether combining two independent products into a new, single
productmight enhance the ability to bring such a product to the market to the benefit
ofcustomers

THE INDIAN LAW ON TYING

18
Article 82 Staff Discussion Paper, Point 205 in Gupta, Anisha, ‘Concept of Tying and Bundling and its Effect on
Competition: A Critical Study of it in Various Jurisdictions’ (2010)

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 One of the objects of the Competition Act in India was to prevent practices
havingadverse effect on competition. They seek to achieve these by various
means.Agreement for price fixing, limited supply of goods or services, dividing the
marketetc. is some of the usual modes of interfering with the process of competition
andultimately, reducing or eliminating competition. The law prohibiting agreements,practices
and decisions that are anti-competitive is contained in Section 3(1) of theAct.

Sec. 3(4) of the Companies Act deals with vertical anti-competitive agreements. Sec.
3(4)says that “Any agreement amongst enterprises or persons at differentstages or levels of
the production chain in different markets, in respect of production,supply, distribution,
storage, sale or price of, or trade in goods or provision ofservices, including-- (a) tie-in
arrangement.......shall be an agreement incontravention of sub-section (1) if such agreement
causes or is likely to cause anappreciable adverse effect on competition in India.”

The Explanation to Section 3(4) defines “tie-in arrangements” as “any agreementrequiring a

purchaser of goods, as a condition of such purchase, to purchase someother goods.”
There are two important issues to be noted at this stage:
1) That tying is not an infringement of section 4, i.e. it is not an abuse ofdominant position in
the Indian law.
2) That the definition excludes services since the word “goods” is explicitlydefined in section
2(i).
The law extends sub-section 4 of section 3 of the competition act 2002 to verticalagreements
by the usage of the expression “agreements amongst.....at differentstages or levels of
production chain in different markets......”

Vertical restraints are subject to the Rule of Reason test. So, the benefits and theharm
have to be weighted before an act of tying can be declared anti-competitive orto have an
appreciable adverse effect on competition, in terms of the language of thelaw.
Under section 19(3) of the competition act, 2002 six factors are provided forconsideration of
competition by the authority before coming to any conclusions.

Section 19(3) states that... “The Commission shall, while determining whether
anagreement has an appreciable adverse effect on competition under section 3, havedue
regard to all or any of the following factors, namely)

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Creation of barriers to new entrants in the market;
b) Driving existing competitors out of the market;
c) Foreclosure of competition by hindering entry into the market;
d) Accrual of benefits to the consumer
e) Improvements in production or distribution of goods or provision of services
f) Promotion of technical, scientific and economic development by means ofproduction or
distribution of goods or provision of services.”
Three of these factors are indicative of the harm to competition while the remainingthree are
pro-competitive and enhance welfare.
The scheme of law is clearly for the application of the Rule of Reason Test.

Case law
In Consumer online foundation v Tata sky Ltd & Ors 19 it was said by the Director
General (DG) that“DTH service providers are forcing the consumers to get into a tie-in
arrangementwith them. They require the purchaser of their DTH Services to also buy/take on
rentthe STBs procured by them. They are not giving DTH services to those who are
notwilling to buy/ take on rent their STBs. This is a clear violation of section 3(4) of theAct
under which a tie-in arrangement would prime facie be considered violative ofsection 3 if it
has an appreciable adverse effect on competition in India‖. Further, asthese four DTH service
providers control more than 80% of the market, any anticompetitivepractice would definitely
have an appreciable adverse effect on themarket. Hence, this is a clear case of a tie-in
arrangement which is having not onlyan appreciable but a „significant‟ adverse effect on
competition in the market.
The supplementary report was considered by the Commission, in its meeting held
on05.01.2010. After having gone through the supplementary report, the Commission,vide its
order dated 08.01.2010, sought additional supplementary report with regardto the issue of
DTH service providers forcing the consumers to enter into a tie-inarrangement.
This issue of tie-in sales of the consumer premises equipment (Set Top Box, SmartCard and
Dish Antenna) was examined by the DG in detail including the reasons forthe continuance of
this practice.
The said report focused on two major interfaces related to „tie-in‟ arrangement.
These are:
 Interface between the DTH service provider and STB manufacturer
19
Case no. 2 of 2009, Competition Commission of India, March 2011.

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  Interface between the customer and DTH service provider

On examination of the agreement between the DTH service provider and thecustomer, it was
noted by the DG that no such clause which directly restricts orforces the customer to enter
into tie-in arrangement is there. However, on account ofthe lack of customer awareness and
lack of availability of Set Top Boxes and otherequipments in open market, the customer does
end up buying all the relatedequipments from the DTH service providers only. The sale of Set
Top Box, SmartCard and Dish Antenna is tied-in as all the three equipments are provided in
onepackage and are not readily available for sale in open market-independent of eachother.
These three components are technically essential as each performs a specificfunction for
availing the DTH service transmission. Owing to the lack of practicalinteroperability and lack
of consumer awareness, the customer has no alternative butto purchase these three
equipments from the DTH service provider whose service heis availing. This ultimately
results in tie-in arrangements of the Consumer PremisesEquipment from the DTH service
provider. Except Dish TV, no other DTH serviceprovider, under investigation, has
specifically and clearly mentioned in its agreementwith the customer that a customer can
avail or procure compatible Set Top Box fromany other source. This offer of Dish TV is also
of no benefit to customer as neitherthe compatible Set Top Box is commercially and readily
available in the openmarket, nor the consumer is really aware of this possibility

Summing up the findings, the DG concluded as under:

―The entire forgoing discussion and the recent developments indicate that the ‗tie-in‘sale of
the Customer Premises Equipment is happening on account of non-availability of
Conditional Access Module (CAM), Set Top Box etc. in the openmarket, lack of consumer
awareness as well as lack of enforcement of licensingconditions by any regulatory authority.
The recent development of the news of thelikelihood of availability of Conditional Access
Module (CAM) in open market will be apositive step towards achieving interoperability. This
can be further enhanced andfully interoperability, which is technically possible, can be
achieved by the availabilityof non proprietary Set Top Boxes in the open market and
enforcement of the clause7.1 of the DTH licensing agreement relating to achieving
interoperability among theDTH Service providers.

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NEGATIVE EFFECTS OF TYING ON THE INDIAN ECONOMY

The negative effects of tying may be discussed under the following heads:-

(1)Price discrimination– Price discrimination that increases monopoly profits is possible

ifthe buyers do not use the tied product in a fixed proportion to the tying product. Here,
thediscrimination is between the persons having different levels of usage of the tied product.
To illustrate with an example, assume that a monopolist is selling a capital product like
aprinter with its correlated consumable say paper. Obviously, usage of paper varies fromone
consumer to another depending on the number of print-outs that they need. Themonopolist
could in such a situation lower the cost of the printer to marginal costcontingent on the buyers
purchasing all their paper from him. The monopolist could thenset the price of the paper well
above the marginal cost and profit from that transaction.
This way, the consumers using more paper shall pay a higher price than those using alesser
amount of paper. Hence, the monopolist engages in price discrimination betweenpersons
depending on their usage of the tied product in situation where all consumers donot use the
same ascertained amount of the tied product.

Another form of price discrimination that might occur in cases of tying takes place
whenthe buyers do not necessarily use the bundled products together. Assuming again that
thefirm is a monopolist in two products, A and B whose cost of manufacture is the same.
Suppose that there are a bunch of buyers who value A at 20 Rs. and B at 12 Rs. and there
are some buyers who value A at 12 Rs. and B at 20 Rs. If the monopolist has to price
theproducts separately then he cannot distinguish between buyers who value the
productdifferently, and shall have to sell both the products for 20 Rs. respectively and he
willearn 20.00 Rs. However, if the monopolist is bundling the two products together then
hewill sell both A and B for 32 Rs. and will earn 24,000 Rs. Therefore, this bundling
allowsthe monopolist to profitably price discriminate when buyer preferences between
productA and product B are not positively correlated.

However, for both the above types of price discrimination to take place, it is a
prerequisitethat the firm has market power in the tying market. However, such price
discrimination can have ambiguous effects in efficiency and consumer welfare. These
agreements may also at times allow an increase in output that will efficiently serve marginal

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buyers who would otherwise have not been able to buy the tying product if it, were just sold
at a separate price. However, it has to be kept in mind that been tying canincrease monopoly
profits.20

(2) Another worrisome outcome of tie-in arrangements is when there is a demand formultiple
units of the tying product and not the tied product. In such a scenario, the sellermight use
bundling as a means to push off slow moving products as tied products.Alternatively, a
monopolist of the tying product can thus maximize profits by squeezingout that consumer
surplus without losing customers by making the tying productunavailable unless buyers take
a tied product form it at a price above the tied marketprice. Hence, either ways, however the
monopolist decides to handle the situation, theconsumer will either be faced to pay a
premium for the product or pay for and buyproducts that he does not need.

(3) Tying can also increase market power in the tied market by foreclosing enough of the
tiedmarket to reduce rival entry, efficiency, existence or expandability. Tying can create
theafore-mentioned anticompetitive effects if one relaxes the unrealistic assumption that
tiedmarket rivals face no fixed costs, have constant marginal costs that do not at all dependon
output, and can expand instantaneously to supply to the whole market. For instance, ifthere
are costs to entering a market, it is profitable for a firm that makes two products tobundle
them to deter entry by an equally efficient rival that can only enter one of thosemarkets. The
reason is that the bundle leaves less of the market available to then rival,and thus can make
the profits of entry lower than the costs of entry. 21

(4) Tying can increase tying market power by impeding entry and expansion from the
tiedmarket or buyer substitution to it. Suppose that, instead of being fixed, a firm’s
currenttying market power is vulnerable to an increased threat of future entry if successful
rivalproducers exist in the tied market. If so, then the firm has incentives to engage
indefensive leveraging, foreclosing the tied market with bundling in order to deter or
delayentry in to the tying market, thus maintaining its market power or preserving for
longerthan it otherwise could. Thus, if successful producers in the tied market are more
likelyto evolve into producers in the tying market in future periods, then it can be profit

20
Einer Elhuage, ‘Tying, Bundled Discounts and the Single Monopoly Profit Theory’, 123 Harv. L. Rev. 397
21
Edwin Hughes, ‘The Left Side Of Antitrust: What Fairness Means And Why It Matters’, 77 Marq. L. Rev. 265

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maximizingfor a firm to use bundling to foreclose rivals in the tied market in order to prevent
or reduce the erosion of its tying market power over time. It would also bepertinent to
highlight here that defence leveraging has even stronger and more immediateanticompetitive
effects if a firm’s tying market power is constrained by the fact that thetied product is a
partial substitute to it or if the technological trend is from the marketwhere the firm has
market power to the market where the foreclosure is occurring.

However, if there is neither a tying market power nor substantial tied market
foreclosure, thennone of the anticompetitive effects may occur. Sometimes, tying may take
place solely dueconsiderations of efficiency. At times, bundling two products might lower
cost or increase value.Two products may be cheaper to make or distribute together, or they
may be more valuable tothe buyer if the seller bundles them than if the buyer does. Another
benefit that might arise frombundling is the improvement of quality. Sometimes the seller of
the tying product might requirethat buyer use its tied product with it because they worry that
buyers will otherwise use aninferior substitute and they will make the tying product work less
well and lower its brandreputation. Lastly, tying may also be used as a mechanism to shift
financing or risk-bearing costsby the firm that can minimize them.22

CONCLUSION

This research paper attempts to explain the basic concept of tying along with a critical
study of it across various jurisdictions. The U.S. and E.U. positions have been considered
along with the difference in theirapproaches, to bring out the advantages and disadvantages of
these approaches.Case laws have been analysed to understand the working and enforcement
of theCompetition/Antitrust Laws.”
It can be concluded from this research that the initial Per-Se Illegality Approach in
respect of tying is nota correct stand. Every case of tying should be judged on its own
meritsand demerits and not in regard with straight- line jacket formulae. A Per Se Approach
prohibits certain acts without regard to the particular effects ofthe acts, i.e. no investigation
into the question of possible pro-competitive effects.The Per-Se prohibition is justified for
22
Einer Elhauge & Damien Geradin, ‘Global Competition Law and Economics’, (Hart Publishing, USA), First Edn.
Reprint, 2008, 498-505 in

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types of conduct thathave manifestly anti-competitive implications and a very limited
potential for precompetitive benefits.
A Rule of Reason Approach on the other hand is about investigating the
effects ofthe challenged conduct, taking into account the particular facts of the case.
TheCourts decide whether the questioned practice imposes an unreasonable restrainton
competition taking into account a variety of factors.The Rule of Reason Approach which
considers the pros and cons of each case ismore favourable to the Indian legal system.
This paper also highlights the various effects that a tying arrangement has on the
competition and economy of the country. It can be said that tying arrangement has
widespread adverse affect on the economy of the country.

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